Building industry fairness (security of payment) bill 2017
The Building Industry Fairness (Security of Payment) Bill 2017 (Bill) was introduced to the Queensland parliament on 22 August 2017.
It’s main purpose is said to be1 “to help people working in the building and construction industry in being paid for the work they do.”
The Bill primarily seeks to achieve this purpose through:
- Use of trust accounts, referred to as project bank accounts (PBAs) for building work;
- Adopting and amending elements from the Building and Construction Industry Payments Act (BCIPA), including BCIPA’s fact track adjudication process for construction work;
- Adopting and amending elements from the Subcontractors’ Charges Act (SCA) for carrying out work in relation to land or buildings. These amendments include a penalty for failing to give a subcontractor certain information within 10 business days; and
- Amending parts of the Queensland Building and Construction Commission Act (QBCC), which are directed to address corporate ‘phoenixing’ in the building and construction industry.
Amendments to BCIPA
Amendments to BCIPA include winding back several of the amendments that were made in 2015. New reasons in complex adjudication responses (and claimant’s replies) will be assigned to history, together with their consequential impacts on the time and costs of adjudicating.
Progress claims will no longer need to state that they are made under the legislation. Regulations are also anticipated limiting the length of adjudication applications and adjudication responses, and capping fees payable to adjudicators. Claimants will also be guaranteed a reference date after contracts are terminated.
Failing to deliver a payment schedule within 10 business days and paying adjudicated amounts will be offences, attracting penalties.
The more significant change, however, will be he PBA regime established by the Bill.
Project bank accounts: overview
Chapter 2 of the Bill seeks to ensure that “money to be paid to particular subcontractors is held in a way that protects the interests of the subcontractors“, by requiring that ‘contracted parties’ (or superior contractors) establish, maintain and administer PBAs.
Many consequences of the Bill are difficult to reconcile with its policy objective (being to reduce insolvency rates in the building industry).
Contracted parties will not be entitled to be paid amounts for building work directly by ‘contracting parties’ (principals). Instead contracting parties will be required to pay amounts to a general trust account, and contracting parties will not be entitled to receive any payment until after:
- Subcontractors are paid amounts due to them;
- Any subcontractors’ retentions are paid to a retentions trust account; and
- Any amounts claimed by subcontractors but disputed are paid to a disputed funds account.
Contracted parties must top up the general trust account from their own cash reserves or bank overdrafts if amounts paid into the general trust account by the contracting party are not sufficient to pay the required amounts to subcontractors, the retention trust account and the disputed funds account.
The Bill also prescribes a range of offences relating to the establishment, use and administration of PBAs with harsh penalties.
The explanatory notes to the Bill recognise2 that “the imposition of the PBA could be considered as providing for the compulsory acquisition of property as it removes the full legal interest in contract money from the head contractor, and reduces them to only a beneficial interest among other beneficiaries.”
PBAs will not only change how cash flows through the Queensland building industry, but how much cash is available to the industry. The PBA requirements will change the fundamentals of many builders’ businesses. Cash flow stress will be compounded and the risk of insolvency in the industry will be compounded.
This seems inconsistent with the policy objectives behind the bill.
The closing date for making submission in relation to the Bill is Thursday, 7 September 2017. Submissions should be sent to: PWUC@parliament.qld.gov.au
Committee Secretary
Public Works and Utilities Committee
Parliament House
George Street
Brisbane Qld 4000
Guidelines for making submissions are available here.
What is PBA?
A Project Bank Account (of itself) is not a bank account. It is a trust3 over:
- Amounts paid by the contracting party to the contracted party under a building contract;
- Amounts a subcontractor is entitled to be paid by the contracted party under a subcontract;
- Subcontractor retentions; and
- Amounts in dispute as between the contracted party and subcontractors.
The Bill appoints the contacted party trustee4 of the PBA, and prescribes a range of offences to complement the trustee’s underlying fiduciary obligations.
Each subcontractor and the contracted party are beneficiaries of the trust5.
Each subcontractor’s beneficial interest is the amount the subcontractor is entitled to be paid under its subcontract, including retention amounts and amounts that are the subject of a payment dispute6.
The contracted party’s beneficial interest is the remainder of the PBA7, being the amount held in the PBA trust after subtracting all of the following amounts8:
- An amount a subcontractor is entitled to be paid by the contracted party under a subcontract;
- A retention amount withheld from a subcontractor under a subcontract; and
- An amount that is the subject of a payment dispute.
Three trust accounts
The contracted party is required to establish three separate trust accounts with a bank or financial institution in Queensland9:
- A general trust account for the deposit of amounts relating to the project bank account and withdrawal of amounts payable to a beneficiary;
- A retention account for amounts held as retention amounts; and
- A disputed funds account, for amounts the subject of a payment dispute.
Failure to establish these trust accounts within the statutory time limits is an offence and attracts 500 penalty units (a fine of $63,075 for individuals or $315,375 for companies).
Topping up
If the amount available in any trust account is less than the amount to be paid from a trust account then the contracted party must immediately deposit the shortfall into that trust account24. Failure to do so attracts a penalty of up to 100 penalty units ($12,615 for individuals and $63,075 for companies) or 1 year in prison.
That is, if there are insufficient funds in the general trust account to transfer to the retention account or transfer to the disputed funds account, or in any trust account to pay subcontractors, then the contracted party must top up the account from their own funds (or overdraft).
Offences and penalties
The Bill prescribes a range of other offences (many with severe penalties) relating to PBAs.
Attachment 1 to these notes lists offences and penalties contracted parties must be alert to.
Attachment 2 to these notes lists offences and penalties principals or contracting parties must be alert to.
The Bill does not prescribe different fines for corporations and individuals, with the consequence the prescribed fine is only for individuals and the maximum fine for corporations will be five times that prescribed for individuals.10
Many penalties are severe, as illustrated by the following table which compares penalties for some PBA offences to penalties for other offences in Queensland:
| Penalty units | PBA offence | Other offences with comparative penalties |
| 500 | Failure to establish PBA trust accounts (i.e. a general trust account, retention account and disputed funds account) within 20 business days of the first subcontract11. | Employer’s failure to notify the administering authority within 24 hours of becoming aware of an event that causes or threatens serious or material environmental harm12. |
| 500 | Where a subcontract is entered before the day a PBA is required (e.g. where a PBA is required only after an amendment to a building contract) – failure to establish required PBA trust accounts (i.e. general trust account, retention account and disputed funds account) within 10 business days after start date of PBA building contract13. | A person who is a participant in a criminal organisation recruits, or attempts to recruit, another person to become, or associate with, a participant in a criminal organisation14. |
| 500 | Failure to15:
|
Dangerous operation of a vehicle while adversely affected by an intoxicating substance or speeding16. |
| 200 | Failure to transfer to the PBA disputed funds a disputed amount as soon as becoming aware of a payment dispute17. | Selling explosives without authority18. |
| 100 | Principal’s failure to inform the commissioner of any PBA discrepancy.19 | Entering Parliament House armed (without lawful excuse)20. |
| 50 | Failure to transfer funds held in the PBA disputed funds account to the PBA general trust account within 5 business days after becoming aware it is no longer needed for the purpose for which it was held21. | Reckless or intentional failure to report the loss or theft of a controlled substance to police within 2 business days (2nd offence)22. |
Significant financial penalties imposed upon builders already suffering cash flow strain (because funds are withheld in the PBAs, possibly with substantial amounts held in the disputed funds account) may push builders into insolvency.
Phase 1 and phase 2
The Explanatory Notes explain that the State government anticipates rolling out use of PBAs in two phases.
In ‘phase 1’, PBA’s will be required:
- For government projects with a contract value of $1m to $10M25;
- If the contracted party enters into any subcontracts for all or part of the contracted building work; and
- If the tender for the contract issues after commencement of the this part of the legislation.
It is not clear when ‘phase 2’ might commence, but then PBAs will be required for building contracts if more than 50% of the contract price is for building work, and the contract price exceeds $1M26.
The bill includes measures to prevent contracting arrangements that seek to avoid the use of PBAs (see clauses 19 to 21, and proposed clause 21A in phase 2).
However, PBAs will not be required for residential construction work relating to less than three “living units”27 or maintenance work28.
Attachment 1: contracting party’s offences & penalties.
Attachment 2: principal’s offences & penalties.
This article was written by Karyn Reardon, Partner.
1See clause 3
2See page 6
3Clause 9(1)
4Clause 9(2)
5Clause 9(3)
6Clause 9(3)(a)
7Clause 9(3)(b)
8Clauses 9(5)
9Clause 23
10see section 181B of Penalties and Sentences Act
11clause 23(1)
12Environmental Protection Act 1994 – s320A(1)(a) and 320D(2)(a)
14Criminal Code Act 1899 – s76(1)
13clauses 23(2) & 23(3)
15clause 24(1)
16Criminal Code Act 1899 – section 328A(2)
17clause 36(2)
18Explosives Act 1999 – section 41
19clause 52(2)
20Criminal Code Act 1899 – section 56B(1)
21Clause 36(4)
22Drugs Misuse Act – sections 43E and 43F
23Clause 36
24Clause 30
25Clause 14
26See clause 214, which will insert a new clause 14.
27See clause 16: a living unit is a detached dwelling, or a residential unit. A duplex is 2 living units
28Maintenance Work is defined in clause 8 to mean means work required on an ongoing basis to prevent deterioration or failure of a thing, restore thing to its correct operating specifications; or replace a component at the end of its working life. However, maintenance work does not include improving a building to increase its capabilities or functions; improving a building to meet new statutory requirements applying to the thing; or a refurbishment or replacement of a building that extends the life of the building.